Thetax payer instead of developing the land, transferred the development rights in
respect of part of the land to a separate construction company. As per the agreement, the tax payer jointly
with the trust was required to convey the land to the proposed buyers. Instead of developing land, the tax payer
parted with the development rights in respect of part of the land forever. The possession of the land had also been
given during the year along with development rights. This was an independent activity having no
connection with the development of the remaining part of the land. The tax payer was following mercantile system
of accounting as per which income accrues when it becomes due for payment. In the instant case, the entire amount become
due to the taxpayer in the relevant year on signing of development agreement
and on handing over of the possession of the land. Under the mercantile system
of accounting the accrual of income does not depend upon receipt of
income. Therefore, the income had
accrued during the year since the transfer was complete during the year. The postponement of payment does not stop
accrual of income. Therefore, even if
part of the payments were received in subsequent years, the entire income had
accrued during the year. However, the
Tribunal allowed the deduction in respect of cost of acquisition of developmentright.
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